Monday, 15 December 2014

A
pickup in demand, a slowdown in shale oil growth, a cut from OPEC and a
recovery in the oil price are expected in 2015

Oil had an eventful
year in 2014. It rose all the way up to $115 in the first half of the year
before collapsing spectacularly in recent months—it now stands close to $60. This
post discusses four key questions which are likely to shape the oil market in
2015.

1. Will demand for
oil pick up?

Yes. Growth in the demand
for oil in 2014 was the weakest in five years—demand rose by only 0.6m barrels
per day (b/d), according to the International Energy Agency (IEA). But demand
growth is set to recover slightly in 2015 to 0.9m b/d on the expectation of higher
growth for the global economy. The International Monetary Fund forecasts an
increase in the growth rate of the global economy from 3.3% in 2014 to 3.8% in
2015. This is likely to have a positive impact on oil consumption. Lower oil
prices are also expected to contribute to the demand increase.

2. Will shale oil
production slow down?

Yes. The rise of shale
oil has been truly impressive. The US oil production is expected to increase by
1.4m b/d in 2014, mostly from shale. This means that the US has added the equivalent
of the total production capacity of a whole country like Libya in one year. However,
these gains are expected to slow down as lower oil prices make some shale projects
unprofitable given the high costs of extraction. Some shale firms have already announced
cuts in their investment spending for next year, while others are expected
to follow suit in January/February when they unveil their investment plans. As
a result, the US oil production growth is expected to slow down to 0.95m b/d in 2015.

3. Will OPEC cut
its production?

Yes. The latest OPEC
forecasts, published
a few days ago, suggest that a cut is probable. These forecasts indicate
that OPEC might need to cut 1.1-1.4m b/d from its crude oil production of 30m
b/d to balance the market and remove the excess supply (see Table 1).

OPEC will probably
wait until significant reductions in the investment spending of shale oil firms
have been announced before embarking on a cut of its own. This means that it is
unlikely to act before February but could potentially step in before its next
scheduled meeting on 5 June 2015. Therefore, the date of the OPEC cut could
be sometime around the second quarter of 2015.

4. Will oil prices
recover?

Yes—if we assume a
pickup in demand, a slowdown in shale growth and a cut from OPEC. Even then,
things might get worse before they get better. The market is likely to be oversupplied
in the first half of 2015 (see Table 2 where I modify the IEA’s projections using
my assumptions).

The implication is
that the average price of oil is expected to be around $60-70 in the first quarter
(Q1) of 2015, before reaching a low of $55-65 in Q2 as inventories build up. A
seasonal recovery in demand and a slowdown in supply growth in Q3 are projected
to lead to a drawdown of inventories, with the price recovering to around $65-75.
The momentum is expected to continue into Q4 when the price is forecast to settle
near
its equilibrium levelof
$75-90. Overall, the oil price is expected to average $69 in
2015.

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About Me (Ziad Daoud)

I am an economist currently based in the Middle East. I have previously worked for an asset management firm and, before that, I did a PhD at the London School of Economics. The views in this blog are solely my own.